The One Chart That Explains the Entire Financial Crisis

This evidence is now pouring in (it was always there, but needed to be collected and coherently laid out) that the financial crisis of 2008 was nearly exclusively created by government’s misguided interventions and manipulations of the housing market.  Gretchen Morgenson’s new book Reckless Endangerment lays out the whole corrupt, government-directed interventionist debacle.  This book was needed but not necessary, it doesn’t tell us something we didn’t already know.  Economists and financial markets experts knew exactly how, why and when the government’s insane pursuit of “affordable housing” built up risks in the system that eventually exploded into the financial crisis.  The Wall Street Journal was warning us to beware of Fannie Mae and Freddie Mac for years.  I personally went to many conferences where speakers accurately predicted the housing and financial meltdown years in advance.  Numerous financial players saw and organized strategies to profit from the very foreseeable blowup, as chronicled in Michael Lewis’s book The Big Short.  (And for every big name player like John Paulson, there were thousands of little guys who made smaller bets against the housing bubble and made nice gains if not the billions that the recognizable names made.)

All of this history and commentary is well worth familiarizing yourself with, but if you had to look at just one chart to understand it all, Mark Perry today has that chart over at his Carpe Diem blog.

3%!  Simply amazing.  3% isn’t even close to serious.  If you are only able or willing to put down 3% you simply aren’t serious about homeownership.  It’s laughable.  3% would have gotten you laughed out of any bank in America prior to 1994.  Yet by 2007 40% of all mortgages had less than 3% downpayments.  It’s additionally frightening to wonder what that number would be for less than 4% down or 5% down, still totally laughable and unserious levels of equity.

I have said it here at SAB and at my own blog for awhile – mortgage lending to creditworthy homebuyers has been a stable, profitable, and boring business in the United States of America for about a hundred years; so for those who blame “Wall Street greed” for the crisis, I ask you “why now?”  Why did greed not appear, not infect the system, not attempt to seize filthy lucre for that hundred years?  Why did greed only show up at that particular moment in time?  I further ask why did greed not make its way to Canada, where they did not have a housing and/or banking crisis?  Is greed only a US and highly time specific phenomenon?

The answer is that government embarked, at the urging of “social justice” activists, on a policy campaign to degrade the prudential standards that prevailed in the housing lending market.  The government effectively demanded and enforced irresponsible lending, and they got it.  Unfortunately the government can’t repeal the iron laws of economics, so what they got was a flimsy, risk-infected financial system that was bound to crash, which it did.

The government caused the financial crisis and ensuing recession.  And as a result the government has claimed more power over the economy under the auspices of a bill named after two of most culpable parties – Messrs. Dodd and Frank – and a whole host of central (and bad) actors are unimaginably wealthy and one is now Governor of New York and talked about as a presidential contender.  Enjoy your country in the 21st century, America!

Related posts